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Brazil, India spurn IMF capital controls framework

13 June 2011

Major developing countries have rebuffed the IMF’s proposed framework on capital controls, or “code of conduct” as it has been renamed. The board paper discussed in March (seeUpdate 75) drew fire from Brazil and India for being too prescriptive and suggesting that controls should only be used temporarily and as a last resort, but the policy will go ahead despite the acrimony.

Brazilian finance minister Guido Mantega launched a scathing attack on the exercise during the IMF spring meetings in mid April. His statement to the meetings read: “We oppose any guidelines, frameworks or ‘codes of conduct’ that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows. Governments must have flexibility and discretion to adopt policies that they consider appropriate.”

At an early May meeting on the reform of the international monetary system, held on the sidelines of the Asian Development Bank annual meeting in the Vietnamese capital Hanoi, Indian finance minister Pranab Mukherjee also poured cold water on the code of conduct: “What I feel is that [the Fund's] framework for managing the capital flows requires more intense discussions and further work is required.”

Ashok Upadhyay, a columnist in Indian financial newspaper Hindu Business Line, cited the Fund’s failures in Indonesia, Greece, and most recently Ireland. He asked: “The IMF has been pretty consistent in getting things wrong because of its ideological blinkers and limited vision … is it any surprise that the emerging economies, having been scalded by the IMF’s disastrous policies, have refused its solution to volatile capital flows?”

In early May, Nobel-prize winning economist Joseph Stiglitz also argued that “as a sop to those who are still not convinced, [the IMF] suggests that [capital controls] should be used only as a last resort. On the contrary, we should have learned from the crisis that financial markets need regulation, and that cross-border capital flows are particularly dangerous. Such regulations should be a key part of any system to ensure financial stability; resorting to them only as a last resort is a recipe for continued instability.”

Writing in the Indian magazine Economic and Political Weekly in early May, Kevin Gallagher of Boston University noted that the IMF’s “new ‘advice’ comes with so many conditions and guidelines that the developing countries have rejected the recommendations and sent the IMF back to the drawing board. Rather than telling developing countries what to do and when, the IMF should perhaps focus more on helping governments enforce capital controls and it should stress the need for the global coordination of those controls.”

Mantega’s April statement also said that “insufficient consideration [has been] given to ‘push’ factors or to the policies in major advanced economies that have produced large and often disruptive financial flows.” Academics have long been arguing that source country policy needs to be considered (see Update 74). Mukherjee also called for flows to be “tackled both at the flowing end and at the receiving end”.

While the code of conduct has already moved IMF analysis away from its firm opposition to capital controls (see Update73, 72, 70), practice in developing and emerging countries has been varied. Korea, like Brazil, has ignored the code and confirmed in late April that it would impose, from August, a levy of up to 0.2 per cent on foreign debt owed by domestic banks. On the other hand, Chile agreed with a late April IMF analysis that additional capital controls are not warranted in the country, despite strong pressure for currency appreciation. In late April, the IMF’s Regional Economic Outlook for Sub-Saharan Africa mentions, but does not take a position on, the measures by Tanzania and Zambia to tighten capital controls to dampen speculation. Instead, it contains a long description of the monetary, fiscal and financial policies that should be taken before resorting to “temporary controls”.

Door open for more discussion?

The debate on the subject will certainly continue. In late May, in Rio de Janeiro, the IMF co-hosted a conference on capital inflows with the Brazilian authorities. Some voices from within the IMF have indicated that the Fund needs to be less prescriptive. In his speech at the meeting, IMF special advisor Zhu Min said the Fund was “looking to you, the participants, to help us analyse the issues over the next couple of days through productive discussions and debates.” At the conclusion of the meeting, the IMF’s chief economist Olivier Blanchard argued that countries need to build their capacity to use capital control in advance of massive inflows, and that “there has to be an infrastructure on a permanent basis.”

Luciana Badin, researcher at Brazilian NGO Ibase, commented: “there must be the acknowledgment of the right a country has to enforce capital controls when necessary and that individual countries must have autonomy to decide when this right is to be exercised. The IMF’s Articles of Agreement already recognise the right, in fact the duty, of countries to manage their capital accounts.”

The IMF board will next discuss the subject in September, for consideration of a paper on the “multilateral aspects”, and in October, for the promised paper on managing capital outflows. By then a new, more orthodox managing director (see Update 76) may be pushing the Fund further away from the stances advocated by Zhu and Blanchard.

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